Can a phrase influence a person or even an entire society into destructive behavior?
The analysis of debt woes is often presented as if it’s a math problem, as though people got too far in debt merely as a result of spending too much money over an extended period of time, and all that’s needed to correct the situation and set it right is to reverse the dynamic.
Mechanically that may be true, but in order to get to that point there first needs to be an epiphany of the mind that moves debt away from the status of a useful tool and back to that of a necessary evil undertaken only under very limited circumstances and always with due caution. Debt is less a friend and more an enabler than anything else.
The lack of any such inhibition has had a significant impact on the debt situations of too many people.
The power of a single phrase
It’s often argued that bankruptcy and foreclosure have become common because they no longer carry the stigma they once did. But can’t we say with at least equal justification that part of the reason bankruptcy and foreclosure are so easily accepted today is because credit was first accepted just as easily? After all, before you can have a debt problem you first have to have debt. How did that happen?
By social acceptance.
Now there are a multitude of ways a person justifies adding more debt to his life and during the years leading up to the credit crisis some of the more common ones were “it’s the American way”, “everybody’s doing it”, “that’s the way (zero down) people buy houses today”, and some even pulled out an adaptation from a treasured children’s movie jingle: “I owe, I owe, so off to work I go”.
I don’t know about anyone else, but I never found the bumper stickers with that last one to be of any comfort. If anything it conveyed…resignation. If that’s how you see your life, you’re pretty much licked!
But the one that I think may have been the most destructive was OPM—other people’s money.
Making a wealth building strategy out of a bad habit
The power of a term like OPM is in the fact that that it converts debt into an opportunity to make money. Most people will at least give pause in using credit to pay for luxuries they can’t otherwise afford, but when there’s an investment angle—a chance to use money to make money—not only do inhibitions drop, but it can make borrowing money seem like an economic benefit, maybe even a wise choice.
No doubt that in the right hands, borrowed money has a multiplier affect. Unfortunately, most people have their hands full making money using their own money, let alone someone else’s.
A person who makes money using OPM is most likely a professional at what ever he or she does, has a proven track record of success and at least some ability to mitigate downside risk. Even at that, if we’re completely honest, “Lady Luck” probably plays heavily in the success stories.
I’d be willing to venture a guess that the number and consistency of successful ventures using OPM even by professionals are most likely exaggerated which at least in part explains why people lose money in business deals and companies are forced to close their doors. Both rewards and risks are magnified when leverage is applied to the mix.
Converting desires into investments
In my early adult life I had a friend and mentor who often told me, “it’s not the truth, but what people believe that matters”. If we hear something spoken enough times we begin to believe it and often it becomes part of the body of conventional wisdom—those ideas we accept to be true without much thought or question.
If we believe that obtaining and using other people’s money is critical to our financial success, getting too far into debt is an easy process. All we need to do is to convert our desires into “investments” and borrowing to obtain them become logical and even necessary.
- If a $200,000 house is a good investment, a $300,000 house will be an even better one. “It’ll be tight, but in the long run, it’ll be worth it.”
- ”I need a Mercedes for my career; it’s important to my image and it’s my image that makes money for me”.
- Joining a pricey, upscale country club under the guise of getting close to the “right people”.
- Borrowing an amount of money comparable in size to a home mortgage in order to put your child through college at a school you can’t remotely afford.
- Buying high end clothing in compliance with another favorite, the “dress-for-success” doctrine.
- Paying for expensive toys, gadgets, camps, and activities for kids as an “investment” in their self esteem.
- Adding a built-in swimming pool in the backyard because it will raise the value of the house (in many neighborhoods it actually does the opposite).
- Buying investment real estate with a minimum down payment, even though you have no experience managing rental properties (OK, you might have help here since TV infomercials make this sound SO easy!).
Do you see the seeds of the many personal debt problems in any of that thinking? Every one of these—and a bunch more—can be justified with the notion that we’re borrowing to pay for something that can be framed as an investment.
And this is only a small sampling of the ways the acceptance of a term like OPM tempts us to take on more debt than we can reasonably handle. I’m not saying that there may not be some investment value in some of these for some people under certain circumstances, but in recent decades they’ve largely become a blanket justification with little basis in reality. Even if there is an investment value, borrowing heavily to pay for them also raises the risk and that’s the part that gets dicey when the numbers get too big.
It’s not an exaggeration to suggest that OPM becomes the financial manifestation of another popular fallacy,
“You’ve gotta fake it til you can make it!”
If we’re borrowing because we don’t have the money to pay for what we want, aren’t we really just…faking???
Spending money is spending money—it’s almost never a true investment. And other people’s money is OTHER people’s money. A saying—or the rejection of it—can make all the difference.
Have you ever used the investment label to justify going into debt to pay for something you couldn’t otherwise afford? Do you know others who have? How much impact do you think OPM has had on the credit meltdown?
This post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.
(Photo credit: alternatePhotography)